Are you curious what the term “Mortgagee in Possession” actually means in Australia? Occasionally, some homeowners go through severe problems.
It can mean different things in different countries. We’re Australian so we’ve built this website for our great country.
What is Mortgagee in Possession in Australia?
In short, Mortgagee in Possession is when you default on your mortgage repayments and they decide to take your house away from you.
You’ve stopped paying and the house now belongs to them. You need to move out ASAP and give them the keys back to the Mortgagee which is your bank.
How this happens
Most Australians borrow money from the bank to buy their home and from there, they become trapped by debt. The property becomes a guarantee.
In other words, if you don’t pay the loan and they will take the house away. Even if you’ve made renovations or improvements, then they don’t care – it belongs to them.
In fact, you signed yourself up for 25 to 30 years of this struggle. You’ll be paying them back 2 to 3 times more than what you’ve paid initially.
Australian banks have the right to take possession of your house if you stop paying your mortgage. This way they can sell it to recover their losses, even if they sell it for less than it’s worth.
When Australian homeowners get in trouble
Each year, thousands of Mortgagee in Possession properties come up for sale on ww.realestate.com.au and we wondered why. Surely there can’t be that many people struggling debt repayments. As it turns out, there are!
These reasons are the most common in our country for such properties to come up for sale on popular real estate websites. Often these properties are sold faster because the bank just wants some money quickly.
Here are the most common reasons for people who stop paying their mortgage in 2020:
1. The homeowner loses their job and struggles to get another one
If that’s you, then you might qualify for a repayment holiday from your bank. Contact them and see what they say. You can also use the severe financial hardship card to your advantage. People who lose their jobs are the most common reason, especially in country areas where it’s hard to get work.
2. Interest rates go up too high
Australia currently has the lowest interest rates in history but they’re not going to stay so low for much longer. From here, the monthly mortgage payments will increase and place a strain on the average Australian who’s struggling to get by.
3. Too much additional debt
So many people with Australian home loans also have car loans, credit cards and other personal debt. It all stacks up and becomes unbearable. In fact, this is a key reason why we start The Debt-Free Community as we wanted to help people like this.
4. Disability forces them to stop working
People often suffer a medical issue at work and can’t do their job anymore, paired with medical expenses. These people then can’t continue paying the loan which adds insult to injury.
5. A couple gets divorced
When two people decide to go separate ways, financial affairs can get very messy with a lack of communication between parties. Neither wants to pay the mortgage despite money being available for both husband and wife.
6. Death of the mortgage payer
When someone dies then their secured debt is still liable for payments, unlike unsecured debt. The loan starts to get defaulted because no one wants to pick up the load and it eventually becomes another Mortgagee in Possession case.
Before Mortgagee in Possession happens
Now before this nightmare happens to you, there are certain hoops that Australian banks have to jump through. In fact, the entire process takes several months usually.
It’s not uncommon for it to be 3 to 12 months for them to finally get those keys from you and force you on the streets. This gives you time to find alternative options including getting yourself another job.
The recovery process
Here’s what will happen prior:
- You’ll get a formal notice of default on the home loan. It will have important information such as how much you have defaulted on, how much you’ll need to pay and by which date. They will also add additional fees (including legal fees) that you must repay as well.
- They will then issue several notices of default. This is quite common in Australia. You’ll see strongly-worded statements that essentially say “This is a legal notice and you MUST pay by the due date or else”
- You’ll have between 1 month and up to 6 months from that 1st default notice to start paying your mortgage again. That’s a long time to look at alternative options, including a FREE discovery call.
- Commonly, within a few months, the homeowner does start paying again and issues are resolved without legal notices. All other repayments will come out like normal.
- You’ll then be hit with an “Acceleration Cause” where the entire debt is owned. Yes – they want the entire loan to be repaid immediately. That’s almost impossible for most people.
- The bank will then go to a local court and seek orders to get you kicked out of your own home. They will have possession and get it sold through a local real estate agent, just like you signed up for in the mortgage contract.
- You’ll get a date by which you need to pack your boxes up and leave. It will be a bittersweet departure.
Oh, and if you decide not to leave, then the police can show up and get you out. In other words, the bank will get the property secured by getting the residents out so they can sell it and make money.
What happens after a Mortgagee in Possession
Now you’re out on the street and the bank has your home in their hands. They are laughing all the way to the bank. (Ok that was a bad joke…)
Basically, once the property is in the hands of the Mortgagee in Possession, they will work on getting it sold ASAP. They don’t want it to be on the market for long so they will lower the price for a quick sale.
It might go to auction or straight to a private buyer who comes in with the right offer. Buyers who have cash are the type that banks love and will often get a discount if they can settle on the property within a few weeks.
Like that YouTube video shows, they will advertise it to people who are looking for bargains. This is because they know the bank will accept a lower offer if they can get the settlement done as quickly as possible.
Mortgagee in Possession Settlement disbursement
Once it is sold, there are these costs that will be paid out by the bank from the money they got:
- The entire mortgage balance. That’s the main one that needs to be cleared and the one you avoided paying for many months.
- Any expenses that they incurred when getting the property ready for sale. That includes repairing walls, mowing the grass and the real estate agent’s commissions for the sale.
- The costs for legal people they used during this process. That’s the expensive part!
Guess what? If there isn’t enough money to pay for all of these, then they will chase after you for the remainder. This is why it’s not a good idea to get to this extreme. Unlike the United States where you can hand the keys back and move on, you’re up for severe penalties if you do this in Australia.
Essentially, you could still be liable to pay up long after your own house got sold from under you. It’s scary!
At the same time, Australian law has requirements for Mortgagees in Possession to be mindful of past borrowers and their situations. They do want to get the best possible price under the circumstances, but also, they don’t want to hassle you too much if they know you’re under financial hardship situations.
How to avoid them taking your house away
It’s frustrating when you’ve worked so hard, only for them to take your pride away from you. They legally can kick you out on to the streets and sell your house to make some money.
However, before that nightmare begins, there are some things you can do.
- Sell your home and get a smaller one. If you’re having mortgage stress, then this is often a good idea. Most people don’t need a large house and we spend most of our lives either working or sleeping in one bedroom.
- Refinance your loan to a cheaper interest rate. You could be paying way more than what you need right now. Your current lender might offer you a better deal but if they aren’t, then go shopping and find a better rate that can reduce your monthly repayments.
- Use a debt consolidation loan if you have other debts. Many borrowers are eligible to bring all their debts under one roof to reduce the burden and overwhelm.
- Tell your lender that you’re having a tough time. It’s too late when they’re serving you legal notices. If you’re having a tough time today, then tell them so. Most are willing to work with you to find a suitable solution to help you with these challenges.
It’s our hope here at The Debt-Free Community that you can avoid situations when debt collectors come knocking. Coming face to face with a Mortgagee in Possession is a terrible situation because they’re going to take away your pride a joy – so many memories and you worked so hard for it!
Do what you can to maintain your home. It’s the best investment you’ll ever make in most cases and something to show for all the years of hard work you’ve done.